(AG Real estate) Overview on hotels business as a part of real estate market

The shortage of good quality hotel rooms in Serbia and Montenegro is obvious. The situation in Montenegro Riviera is somehow better since the privatization of existing hotels and the building of new dwelling capacities during the last three years have succeeded to compensate, during the main tourist season, the ever growing demand.

There is also a tendency in larger Serbian cities to build smaller business type hotels, mainly distant from the city downtown areas. Those hotels are mostly used by business people who are not staying more than a day or two and whose request is mostly concerning services for an overnight and breakfast.

The forecast is that within the next 5 years the domestic market will see the construction of quite a lot of new hotels and at the same time the existing one will have to be refurbished as well. In accordance to the further development of the state and of the market will depend the level and the scope of further hotel business here in Serbia!

The hotel business has started in the middle of the 18th century, in the very distant year of 1760 in London and later on in Paris under the name of "hotel garni". At the end of the century it extended to major European cities. In North America hotel business had its beginning in the first year of the 19th century with an expansion all over the continent from the Atlantic coast to the Pacific. The evolution of the development from “innkeeping” to “hotelkeeping” took place simultaneously in the Old and the New Worlds. In the 19th century hotels are becoming centers for social gatherings and not only places for commercial services for passengers. In the period from 1850 to 1950 there was a considerable increase in the number of passengers that were not traveling for business purposes but as tourists and vacationers. With the development of transportation means and appurtenant infrastructure there was a growing need for hotels which will render services to people being away from their homes.

Today, in accordance to statistics of the World Tourist Organization (WTO), total global capacities are exceeding 14.5 million of rooms. The Economic development is in direct connection with the development of hotel industry. When considering total hotel capacities in Europe, more than a half of those are situated in five countries: Italy, Germany, France, Spain and England. Italy is the leading European country for its hotel capacities, i.e. 17.5% of all European capacities meaning more than million rooms. The U.S.A. has more than four million rooms or more than one third of total global capacities. With the opening of East_European countries and China, there is a substantial of global hotel capacities, with the penetration of world known hotel chains and their positioning on new markets.

What is essential?

Before embarking on a hotel investment, a prudent investor gains a general knowledge of the hotel industry and the ways in which it works.

The location of hotel is the most important element in the development of a hotel. The market requirement and the guests target group are determining the type and the hotel purpose. Hotels located in the business areas, in principle, are the one reaching the highest level of occupancy in comparison with hotels having a seasonal character. By definition hotel is an institution where production and sales are taking place under the same roof. Five main elements are defining a hotel: location, facilities, service, image and price. The individual elements assume greater or lesser importance for different people. A marketing feasibility study for each individual hotel project must aim at identifying the segment of the market to be serve. In accordance to given services the basic classification of hotels is the following: hotels with full service and the one with limited services. On the other hand when considering the social gradation hotels are classified to upper middle class, middle class, lower middle class or the so called economy-budget hotels. Large hotel companies have created their own brands which are defined by standards and by the level of services. This way each passenger knows in advance the services he shall be offered for the price he is paying.

From the global view the hotel industry is expanding, after a slump being provoked by 11 September events in America. Hotel companies are particularly focusing on new markets like the East-European countries and the Developing countries. Furthermore, some of these countries have by far a higher economic growing rate in comparison to the developed countries having in the same time a bigger fluctuation of people and capital, which is on the hand stimulating investments in the hotel industry. Hotels in the Central and Eastern Europe during 2005 had a growth rate reaching 12.5% while the hotels in Western Europe had an average growth of 3.8 %. Only Moscow had a growth of 30.4 %.

The influence on the positive growth tendency is among others the increase of airlines offering "low-cost" transportation fares. However, there is a big shortage of international hotel chains in Eastern Europe in relation with the market demand.

Basic rules

Hotel investment is basically profitable. The investors, with a professional management, are enabled to a relatively stable income with predictability of the investment return. The hotel investment is measuring in accordance to the construction cost per room, since the room is the basic generator of income.

When forming the cost price of building a hotel, the investor is usually sticking to the pro rata participation of each category in the overall budget. The following table shows the pro rata participation:

Remark: The shown percentage represents average values and is depending of the market where the hotel is built.

The role of Thumb Method, that every euro of an average room rate should support approximately euro 1000 of total hotel value on a per room basis. In other words if the total cost of hotel is 5 million of euros, the average daily cost per room has to be 50 euros in order to have the investment successuful.

Anyway the concept and the category of the hotel category are defined by market demand. Today the most profitable hotels are 3 star hotels or the so called economy-budget hotels. Usually those are hotels offering limited services (bed and breakfast).

The running costs of such a hotel are incomparably lower in comparison to the hotels with full service. For example, a hotel with 100 rooms with limited service has in average 12 employees while the same hotel with full service has 70-80 full time employees. Complete hotel construction with limited service costs between 32 – 36.000 euros per room, without land costs depending of the market where the hotel is built.

With an average occupancy of 55%, the investor can expect some 30% per year on invested money plus the market plus the market value as a “running business” and which depends on the business results. Hotel as an investment is not depending on the market fluctuation of housing or office space prices but rather on economic trends in the country.

European South-East countries, which population is exceeding 50 million have the lowest percentage of presence of international hotel chains. Belgrade, as a future economic center of the Balkans, according to some analysis should build 6-8 hotels more and exclusively business type hotels in the category of 3 and 4 stars!

Slobodan Vrzić,

Hospitality Industry Consultants

[email protected]